Small-cap index hits 14-month low as investors continue to liquidate

A gauge for the performance of shares of smaller companies hit its lowest level in nearly 14 months as investors continued to liquidate their holdings from the broader market. The Nifty Small-cap 100 index on Thursday fell 0.6 per cent to end at 6,977, lowest since May 24, 2017. On the other hand, the blue chip-focused Nifty 50 index fell just 0.2 per cent. The Nifty Mid-cap 100 also declined 0.72 per cent 17,887.

This was in continuation of the market trend, where headline indices are hovering near their week but the broad-market focused small-cap and mid-cap indices have declined to multi-month lows.

On a year to date basis, the Nifty Small-cap 100 index is down 24 per cent, Nifty Mid-cap index is down 15.4 per cent even as the Sensex has gained 6.74 per cent and Nifty is up four per cent.

“The Nifty is up 4 per cent year to date but most investors' sentiment suggests a bear market. A majority of Nifty constituent stocks are down and 40 per cent of them are down more than 10 per cent in 2018. Of all listed stocks, 60 per cent are down at least 20 per cent,” points out a note by UBS titled ‘A tale of two markets.’

Gains in select stocks, particularly those with high weightage in the index, have helped the benchmark indices deliver positive returns.  UBS says it is quite typical for top 10 large stocks to outperform, however, the trend gets accentuated during periods of currency weakness.

The rupee on Thursday ended at 69.05, its all-time closing low against the dollar.

“This is not new and the top 10 stocks have outperformed the Nifty over the longer term too. Such outperformance historically has been seen prominently during periods of currency weakness. Risk aversion may be the cause, as top-10 earnings are not really geared to a weaker rupee. Interestingly, outperformance phases have not necessarily been due to relative re-rating historically, and even now, the outperformance is more earnings driven,” say UBS analysts Gautam Chhaochharia and Sanjena Dadawala in a note.

As per the brokerage, the outperformance in the top 10 stocks have lasted anywhere between 6 months to 1.5 years in the past phases.

“The current one has lasted 6 months so far. The magnitude of outperformance is similar to past phases, but in a shorter period of time. Historically, during periods of divergent performance, the underperforming index has usually caught up only when currency has reversed,” say the analyst duo.

Despite the sharp underperformance of small-and mid-cap indices to the benchmarks, their valuation premium still remains high, experts point out.